We’ve Only Just Begun

The impact of the eurozone debacle, slow worldwide growth and the fact that global banks are cutting back on lending are all reasons why this area is now facing a meltdown in bank lending. Staggering figures out this week have revealed that Middle East syndicated lending for H1 2012 touched US$ 190 million – a frightening 98% fall from US$ 10.2 billion a year earlier. Five years ago, ME corporate lending had hit a massive US$ 144 billion.

There is some little respite in the fact that debt capital markets are picking up some of the shortfall with a 50% year on year increase to US$ 17 billion.

Following nearly two years of talks about the restructuring of Dubai Group’s US$ 10 billion debt, it seems that some of the banks have lost patience and are considering withdrawing from further discussions. The impasse has arisen despite other government related entities having already refinanced their debt this year. These include JAFZA (US$ 2 billion), DIFC (US$ 1.5 billion) and Dubai Holding (US$ 500 million).

Jordan Dubai Capital, a subsidiary of Dubai Capital, was established in 2005. A Hong Kong private investment fund, HPF, paid US$ 135 million for the acquisition of a company that was based in Amman.

Whilst one local group is cashing in another is splashing out. Jumeirah Group is reported to have expensed US$ 80 million for a 25-year management contract to run a new 180-room hotel in Baku, Azerbaijan. The Jumeirah Bilgah Beach Hotel is the latest addition to the Group’s portfolio which reached 20 properties with this week’s opening of the Dubai Duty Free-owned Jumeirah Creekside Hotel.

Another company may have to reach for its cheque book if it is successful in Afghanistan’s second ever oil auction, covering certain blocks in the north. Dragon Oil, 51% owned by Dubai government via ENOC, is one of eight companies that have been approved by The Afghan Ministry of Mines.

One more organisation  after your money is the Dubai developer, Range Developments. The firm is planning to build a US$ 200 million hotel on St Kitts and Nevis and are looking for investors who are willing to buy a share in the project.

Last week’s blog noted the boom in tourists which had resulted in a 10.4% year on year increase in passenger numbers at Dubai airport, bringing the YTD total to 23.2 million. Consequently it was no surprise to see that Dubai Duty Free announced an 11% increase in sales of over US$ 770 million for H1 2012.

The fact that summer is here can be seen from the latest hospitality figures with May hotel occupancy dropping to 79% (from a March high of 89%). Although there has been a 13% increase in RevPar (revenue per available room) over the first five months of the year, May did witness a monthly drop in the average room rate from US$ 290 to US$ 204.

One Dubai sector not bothered about the heat is real estate. The Al Barari development has just announced the release of 33 villas with a price range of between US$ 5.5 million and US$ 9.5 million. Obviously there are still some investors who have yet to hear of the coming of the second GFC!

This comes at a time when the local property market is at the beginning of quite a revival. Reports indicate that some locations have seen annual price increases of 20% – such rates have not been seen since the halcyon days of 2008.

The emirate’s biggest developer, Emaar Properties, is reported to be looking at issuing a US$ 2 billion sukuk to help future expansion plans. Last month the company launched its newest residential project, The Views – with 224 apartments – which sold out in a day.

Emaar’s shares are currently trading at US$ 0.84 – almost the same level as this time last year. The DFM Index closed the week down 19 at 1491 in fairly lacklustre trade as the holy month of Ramadan approaches.

Conflicting fortunes for two locally-based engineering-related companies. The Australian firm, Hastie Group – with 7,000 employees of which 20% worked here – went bust in May. It had reported a US$ 150 million loss in H2 2011 and an “accounting irregularity” of almost US$ 20 million, apparently perpetrated in Brisbane. Now it seems that their former CEO, Bill Wild, is apportioning much of the blame for their demise on a series of bad acquisitions in the Middle East. So much for due diligence!

Meanwhile UK-based Driver Group has seen their revenue rise 35% in the six months to March 2012 mainly because of a 50% surge in ME operations. (This comes on top of news that Balfour Beatty last month reported that major improvements in Dubai had helped the company maintain its order book at around the US$ 23 billion level).

On a global level, the big four emerging markets – BRIC – are seeing a worrying downturn, the speed of which  has surprised many analysts. Q2 saw nervous investors withdraw hundreds of millions of dollars from related stock funds. It seems that not only the eurozone crisis is having an impact on continued growth in these markets but also the deteriorating US economy.

The old Berlin Wall was a symbol of the political separation between east and west Europe. The new Berlin Wall is an economic symbol beginning to divide north and south Europe. One just has to compare the government credit ratings and bond yields of the different eurozone countries to see that it will be only a matter of time before there are at least two currencies in the eurozone. The 10 year bond rates highlight the widening gap – Greece at 25.51%, Portugal 10.58%, Spain 6.83% against Germany’s 1.32%, Netherlands 1.70% and France 2.25%.

The alarm bells have been ringing for some time but have fallen on deaf ears. In relation to the real trouble, it’s true to say that we’ve only just begun.

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